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Heavy Equipment Industry Feeling the Squeeze

Mon December 13, 2021 - National Edition
Jenna Hardie

First, the good news: The heavy equipment industry will likely see an increase in sales and demand given the recent passage of the $1.2 trillion infrastructure bill.

Now, the not-so-good news: The industry, both on the manufacturer and the dealer side, was already feeling the pressure of material shortages even before the new legislation appeared on the scene.

The bipartisan infrastructure package includes $550 billion worth of new federal investments in America's infrastructure over five years, including $110 billion for roads, bridges and major projects. For heavy equipment dealers, this means an additional layer of demand with the funding of major projects across the board in the next five to 10 years.

"Inevitably, the infrastructure bill is going to result in even more demand — across many industries — which has already become stronger than even pre-pandemic levels," said Darren Grahsl, team lead of commercial finance at BOK Financial.

But with that increased demand comes already low supplies of equipment, parts — and labor.

"What we've seen in the last 20 months or so is the inability of heavy equipment manufacturers in the U.S. to meet the demand in the market," said Martin Brown, director of commercial finance at BOK Financial. "When the pandemic hit last spring, all those facilities stopped producing — and not only did they stop, but their supply chain stopped as well."

The direct effect was that the supplies many heavy equipment dealers had in stock quickly sold, while the wholesale supply to those dealers waned. As the economy picked up earlier this year, so did demand, exposing resupply issues driven by a shortage of materials (like steel and computer chips).

"The lack of materials isn't only about the microchip shortage — although that's a big one. It's affecting everything across the assembly line, like O rings that go in a cylinder," Martin said. "The inability to have those products finished so they can be delivered to the factory can be impactful."

What This Means for Dealers

The heavy equipment industry hasn't seen challenges like this since the Great Recession in 2008-2009.

"During that time, the demand fell through the floor," Grahsl said. "Once machine demand dropped, the companies supplying products were impacted, so they slowed down and cut costs to right-size their business."

Typically, when demand returns, plants need time to get up and running to produce at their previous levels.

Dealers are currently hearing from manufacturers that if they want equipment in 2023, they need to order it now. "This means that they're making a 12- to 18-month bet that they will have a buyer for that piece of equipment in a year," Brown said.

But placing orders that far into the future comes at a risk, as the economy and demand can fluctuate quickly in just a few months. And that risk, in turn, can affect dealers' ability to finance those purchases.

"These economic factors are all very complex," Brown said. "We're committed to keeping tabs on how these issues are effecting our clients, especially during this unprecedented situation."

The infrastructure bill mitigates that risk because it is likely to spur demand for heavy equipment for the next five to 10 years.

"A lot of these projects that will be funded by the infrastructure bill are multi-year projects encompassing airports, highways and bridges," Grahsl said. "While dealers are more comfortable investing in inventory that may not be coming until 2023, they're still relying on trends in the market and information from their sales teams to make these educated decisions."

Higher Costs, Skilled Workers

Even with the promise of more funds, the heavy equipment industry is dealing with multiple challenges simultaneously, making it difficult to predict when the supply chain will stabilize enough to meet demand.

The materials needed to meet the demand for heavy equipment are scarce, meaning that the price of the raw materials — such as steel or rubber — is already increasing. Couple this with the increasing cost of wages and the result can push inflation, which is passed along to the heavy equipment buyers and consumers in general.

Another impactful challenge for the industry: skilled labor shortages, which have plagued dealers and added to the pressure created by supply chain challenges.

"Skilled labor shortages have been almost constant for years, which severely limits a dealer's ability to service equipment already in the market and keep it operational long-term," Grahsl said.

The industry has been addressing the shortage itself, as the Associated Equipment Distributors (AED) Foundation has now accredited more than 50 community colleges and high schools across the United States to teach an AED-developed curriculum that meets industry-recognized standards and expectations. The goal is to help create a strong and robust pipeline of skilled workers across the country for member organizations and the industry in general.

The new infrastructure law will provide a basis for industry growth for years to come.

"What we are seeing is optimism from our dealers, strong performance and greater efficiencies within the industry," Grahsl said.

"I think the issue really lies with equipment availability. It's a great thing that the federal government is investing in infrastructure, but manufacturers still need to catch up on the supply side."

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